The judgement contains a detailed and what we would say is a damning critique of IR35, and the judge has issued binding guidance which effectively rewrites the IR35 rulebook

Gareth Williams Professional Contractors Group

The new tax law, known as IR35, was designed to crack down on some people avoiding tax and National Insurance contributions (NIC) by operating through a personal service company.

The legislation came into effect in April 2000.

However, the judge, Mr Justice Burton, said the Inland Revenue's approach to IR35 had been confusing and in some respects "inflexible".

The judge issued enforcement guidelines which a lobby group representing IT and engineering consultants claimed as a victory because it would force the Inland Revenue to change its approach.

"The judgement contains a detailed and what we would say is a damning critique of IR35, and the judge has issued binding guidance which effectively rewrites the IR35 rulebook," said the lobby group's chairman, Gareth Williams.

Michael Portillo, the shadow chancellor, added: "Parts of this ruling will come as a personal blow to Gordon Brown."

"In establishing the facts surrounding the case, the judge said that Gordon Brown's new tax had created uncertainty for contractors who can't know how much tax and national insurance they would have to pay on a particular contract," he said.

Brain drain

The court ruling followed a judicial review which was granted to the lobby group in October.

What the judge said:

IR35 should be less restrictive IR35 could expose contractors to uncertainty Some contractors will leave the UK Some foreign contractors will be put off from coming to the UK

The Professional Contractors Group (PCG) had argued that the Inland Revenue policy change constituted a breach of their human rights and discourages them from trading in the UK.

It also argued that the measure in effect provided state aid to bigger firms because independent consultants are charged more tax than a contractor hired in from a larger competitor.

Unpopular

Controversy over IR35 began almost as soon as it was announced in the March 1999 Budget.

It was quickly branded as an attack on the enterprise culture of the information technology industry.

The UK's Conservative Party has pledged to abolish the controversial IR35 tax if it wins the next election.

The tax affects about 100,000 consultants, mainly in the information technology (IT) and engineering industries, and has been blamed for driving hundreds of specialists abroad, or out of business.

Tax crackdown

The government said the point was to crack down on tax avoidance, which has seen some people leave work as an employee on Friday and return to do the same job on Monday as a one-person company.

The Inland Revenue argues that people who would otherwise be hired as staff, but who instead sell their services to companies via their own small firms, should be deemed as directly employed.

That way, they will be paying fair tax and national insurance contributions, the Inland Revenue argues.